Estate Planning: Why You May Want To Consider A Trust Instead Of A Will

Have you come to the stage in life where you are contemplating retirement or how to protect your assets after you're gone? Do you want more control over the estate planning process than you might get with a traditional will and testament? Establishing a trust may be an option worth considering. Benzinga takes a quick look at trusts and whether they could be the best way to go about protecting your assets and your loved ones.

What Is A Trust And How Do They Work?

A trust is a financial arrangement where you transfer some or all of your assets to a fiduciary (known as a trustee), who will manage those assets and distribute them in accordance with the terms you set in the trust. Many successful real estate investors prefer trusts to wills because trusts can offer them asset protection while they are alive and more security in knowing their final wishes will be honored after they are gone.

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When you establish a trust, you can name yourself, various family members or a charity of your choice as a beneficiary. Whoever you name as beneficiary will receive the proceeds of any income created by the trust, and you can also establish your trust to automatically convert from you as beneficiary to whoever you name as beneficiary (or beneficiaries) after your death. This process contrasts with what might happen with a traditional will.

Some Trusts Are Not Subject To The Probate Process

The point of wills and trusts is to memorialize your final wishes in the distribution of your assets after your death.  However, wills cannot be executed until they complete the probate process. During probate, the authenticity of your will is verified and the value of all your estate is debited to pay off existing financial liabilities you had at the time of your death (unpaid medical bills, personal debt, tax debt).

Probate is a public process that takes place in conjunction with the local courts. Depending on the size of your estate, the total amount of your liabilities or other variables such as people contesting your will, the probate process can take anywhere from several months to several years. More importantly, your final wishes won't be honored until the probate process is complete.

It's possible there could be a sizable disparity between what you left for your loved ones and what they receive after liabilities and estate taxes are accounted for. However, living trusts are automatically executed without any probate process. You can establish your trust while you are still alive and move assets into the trust over time. Additionally, the instructions in your trust will be carried out immediately by the trustee after you pass away.

Are Trusts Right for You?

Trusts offer a host of potential advantages, but they are not without potential pitfalls. First, no trust is better than whoever you designate as trustee. They will be in a position of extreme power over the trust assets and although they have a legal obligation as fiduciaries to the trust, the possibility always exists that a trustee may commit impropriety. So, choosing your trustee is one of the most important decisions you’ll ever make.

You can choose between several different kinds of trusts, but that decision is important. Depending on the type of trust you establish, you may not be able to move assets out of it or change beneficiaries in the future. The larger question of whether a trust is right for you depends on a myriad of variables such as your estate planning priorities, your asset profile and how you want your assets split.

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Two people could have identical net worths and a trust may be right for one but not the other. Or maybe it's the right plan for some of your assets but not all of them. The best move is to consult a professional about your situation and your goals and find out if a trust is the best way to protect your assets. It could end up being the ideal solution for you.  

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